High Risk Series: Medicare Claims (Letter Report, 02/95, GAO/HR-95-8).

In 1990, GAO began a special effort to identify federal programs at high
risk of waste, fraud, abuse, and mismanagement.  GAO issued a series of
reports in December 1992 on the fundamental causes of the problems in
the high-risk areas.  This report on Medicare claims is part of the
second series that updates the status of this high-risk area. Readers
have the following three options in ordering the high-risk series: (1)
request any of the individual reports in the series, including the
Overview (HR-95-1), the Guide (HR-95-2), or any of the 10 issue area
reports; (2) request the Overview and the Guide as a package
(HR-95-21SET); or (3) request the entire series as a package
(HR-95-20SET).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HR-95-8
     TITLE:  High Risk Series: Medicare Claims
      DATE:  02/01/95
   SUBJECT:  Medical expense claims
             Medicare programs
             Health insurance cost control
             Fraud
             Program abuses
             Health care cost control
             Payments
             Health maintenance organizations
             Claims processing
             Medical information systems
IDENTIFIER:  High Risk Series 1995
             HCFA Medicare Transaction System
             Medicare Trust Fund
             
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Cover
================================================================ COVER


High-Risk Series

February 1995

MEDICARE CLAIMS

GAO/HR-95-8

Medicare Claims


Abbreviations
=============================================================== ABBREV

  HCFA - Health Care Financing Administration
  HMO - Health Maintenance Organization
  MTS - Medicare Transaction System

Letter
=============================================================== LETTER



February 1995

The President of the Senate
The Speaker of the House of Representatives

In 1990, the General Accounting Office began a special effort to
review and report on the federal program areas we considered high
risk because they were especially vulnerable to waste, fraud, abuse,
and mismanagement.  This effort, which has been strongly supported by
the Senate Committee on Governmental Affairs and the House Committee
on Government Reform and Oversight, brought much needed focus to
problems that were costing the government billions of dollars. 

In December 1992, we issued a series of reports on the fundamental
causes of problems in designated high-risk areas.  We are updating
the status of our high-risk program in this second series.  Our
Overview report (GAO/HR-95-1) discusses progress made in many areas,
stresses the need for further action to address remaining critical
problems, and introduces newly designated high-risk areas.  This
second series also includes a Quick Reference Guide (GAO/HR-95-2)
that covers all 18 high-risk areas we have tracked over the past few
years, and separate reports that detail continuing significant
problems and resolution actions needed in 10 areas. 

This report discusses our concerns over Medicare's exposure to losses
through waste, fraud, and abuse.  Since we reported in 1992, the
Health Care Financing Administration, the agency responsible for
administering Medicare, has implemented various measures to improve
controls over unnecessary and inappropriate Medicare spending. 
However, Medicare continues to be highly vulnerable to exploitation. 
Inadequate funding for contractors' antifraud and antiabuse
activities, uneven implementation of payment controls, flawed payment
policies and abusive billing practices plague the program.  Moreover,
Medicare's controls against fraud and abuse have not kept pace with
health care's more complicated financial arrangements. 

Copies of this report series are being sent to the President, the
Republican and Democratic leadership of the Congress, congressional
committee chairs and ranking minority members, all other members of
the Congress, the Director of the Office of Management and Budget,
and the Secretary of Health and Human Services. 

Charles A.  Bowsher
Comptroller General
of the United States


OVERVIEW
=========================================================== Appendix 0

Last fiscal year, federal spending for the Medicare program totaled
an estimated $162 billion, or over $440 million a day.  The
Congressional Budget Office estimates that, in less than a decade,
Medicare spending will more than double, exceeding $380 billion in
2003.  The portion of Medicare spending attributable to waste, fraud,
and abuse cannot be quantified precisely, but health care experts
have estimated that as much as 10 percent of national health spending
is lost to such practices. 

In 1992, GAO reported that Medicare was one of several government
programs it considered highly vulnerable to waste, fraud, abuse, and
mismanagement.\1 Since then, the Health Care Financing Administration
(HCFA), the agency responsible for administering Medicare, has made
various regulatory and administrative changes aimed at correcting
flawed payment policies, weak billing controls, and deficient program
management.  However, these worthwhile improvements still are not
sufficient to protect Medicare against continued program losses.  As
the nation's health care delivery system evolves with such changes as
consolidations of various provider types and increasingly complex
financial arrangements, the Medicare program remains highly
vulnerable to waste, fraud, and abuse. 


--------------------
\1 High-Risk Series:  Medicare Claims (GAO/HR-93-6, Dec.  1992). 


   PROBLEM
--------------------------------------------------------- Appendix 0:1

In our 1992 report, we noted two problems related to the Medicare
claims processing contractors, which are responsible for applying
controls against fraud and abuse.  First, the funding of contractors'
activities to control fraud and abuse has not been commensurate with
the growing volume of claims.  As a result, today Medicare pays more
claims with less scrutiny than at any other time in the last 5 years. 
Between 1989 and 1994, the requirement for contractors to review a
portion of claims in process dropped from 20 percent to 5 percent due
to reduced funding.  Inadequate funding has also stunted the
development of new controls to protect Medicare benefit dollars. 
Second, Medicare claims administration is a complicated process, with
some 80 contractors sharing responsibility for claims processing,
payment, and review.  Because HCFA's management of contractors'
antifraud and antiabuse activities provides these contractors with
broad discretion, the implementation of payment controls is uneven
across the Medicare program. 

In addition, HCFA is aware that flawed payment policies and abusive
billing practices plague Medicare, but the exploitation of the
program continues.  For example, Medicare has been charged rates as
high as $600 per hour for speech and occupational therapy, though
therapists' salaries range from under $20 to $32 per hour.  The
extraordinary markup between the cost and charges for services is the
result of certain weaknesses in payment rules permitted by Medicare. 

As another example, the program overpays health maintenance
organizations (HMO) serving Medicare beneficiaries as a result of a
flawed payment methodology.  Numerous government and independent
studies show that Medicare pays more for the treatment of
beneficiaries in HMOs than it would have spent if the beneficiaries
had remained outside the HMO network. 


   PROGRESS
--------------------------------------------------------- Appendix 0:2

HCFA has acted on certain payment and billing control problems and
has initiated two broad efforts to deal with fraud and abuse.  In
1993, HCFA established a requirement that raised the standards for
contractor performance regarding analyses of payment data.  In 1994,
the agency awarded a contract for developing a national automated
claims processing system intended to replace the several systems
currently operating.  Through these efforts--promising modern data
analysis techniques and greater uniformity in claims processing--HCFA
expects to reduce Medicare's inappropriate payments.  Initially,
unreliable data and inadequate guidance from HCFA impaired the
contractors' implementation of the data analysis requirement, making
it premature to determine the success of this effort.  Similarly, the
new automated claims processing system is still in the planning
stages and will not be ready for operation for at least 3 years. 


   OUTLOOK FOR THE FUTURE
--------------------------------------------------------- Appendix 0:3

Medical service delivery is becoming more complex.  Companies as well
as independent providers are delivering health care services and
billing Medicare.  Even some of Medicare's claims processing
contractors--which are also private insurers--are investing in
provider networks.  This means that these contractors, which are
responsible for reviewing the appropriateness of Medicare claims are
also, in principle, billing Medicare through the medical networks
they own. 

Medicare's traditional controls against fraud and abuse have not kept
pace with health care's more complicated financial arrangements. 
This situation raises concerns about the government's ability to
protect Medicare funds in an increasingly entrepreneurial health care
environment. 


BACKGROUND
=========================================================== Appendix 1

Medicare is the nation's largest health payer--its outlays are
exceeded only by social security, defense, and interest payments on
the national debt.  Medicare is also the fastest growing program in
the budget.  In less than a decade, Medicare's expenditures have more
than doubled, from $70 billion in 1985 to $162 billion in 1994. 
Medicare's Hospital Insurance Trust Fund is the source of
reimbursements for hospitals and other institutional providers.  In
1994, the Board of Trustees estimated that the fund could be depleted
by 2001. 


   FEDERAL PROGRAM AT RISK
--------------------------------------------------------- Appendix 1:1

Flawed payment policies, weak billing controls, and inconsistent
program management have all contributed to Medicare's vulnerability
to waste, fraud, and abuse.  For example, in our 1992 high-risk
series report we noted the following. 

Because Medicare payments for laboratory services were excessive,
laboratories' profit rates from Medicare business substantially
exceeded the laboratories' overall profit rates. 

A scam involving mobile physiology labs grew into a multimillion
dollar fraud, initially involving Medicare before moving on to other
public and private payers.  In Medicare, the scam took advantage of
Medicare's weak controls over provider billing numbers. 

Hospitals and other health providers owed Medicare millions of
dollars in mistaken payments when, in the absence of HCFA guidance
and monitoring, contractors failed to recover the erroneous payments. 


   WHAT ARE MEDICARE'S CONTROLS
   OVER WASTE, FRAUD, AND ABUSE? 
--------------------------------------------------------- Appendix 1:2

Controls over waste, fraud, and abuse help ensure that Medicare does
not pay for unnecessary or inappropriate services.  These controls
come in various forms.  Some are electronic:  they are programmed
into computer software for claims processing and trigger the
suspension of payment for incomplete or erroneous claims.  For
example, if the number of digits in a provider's billing number or
beneficiary identification number is incomplete or otherwise
incorrect, the computer automatically holds the claim until the data
are corrected. 

Electronic controls can also stop processing when claims do not meet
certain conditions for payment.  For example, when one contractor
found that spending for foot care services increased more than
threefold--from about $470,000 to about $1.8 million in a 3-year
period--it developed a payment policy covering foot care under
certain conditions.  It enforced the policy by developing a
computerized control that flagged for further review foot care claims
not meeting the conditions stipulated.  Within a year, the
contractor's payments for foot care procedures dropped to about
$620,000, or a third of what it paid the previous year. 

Another form of control is the analysis of detailed payment data to
establish spending trends.  In the example above, contractor staff
examined several years of data on spending for foot care procedures
and determined that in 1991 the contractor paid significantly more
for these services than in prior years. 

Another control entails the audit of an individual provider's claims
to detect fraudulent or abusive billings.  Contractors identify
providers whose billing patterns appear irregular.  In these cases,
they review claims for a sample of the provider's patients to verify
that the services were appropriate and billed properly.  This can
involve reviewing medical records and interviewing providers. 

Fraud and abuse controls are applied by Medicare claims processing
contractors, which HCFA hires and is responsible for managing. 
Medicare's contractors are insurance companies, such as Blue Cross
and Blue Shield, Travelers, and Aetna.  Contractors each receive an
administrative budget to pay for the cost of processing claims and
performing antifraud and antiabuse activities. 


RECENT HCFA INITIATIVES INTENDED
TO REDUCE MEDICARE'S VULNERABILITY
=========================================================== Appendix 2

HCFA has taken several steps to address long-standing problems with
inappropriate payments.  These steps are either very recent or only
preliminary to corrective action.  Foremost among HCFA's actions are
(1) the establishment of a data analysis requirement for contractors
to better identify excessive spending and (2) letting a contract to
design a single automated claims processing system that promises
greater accuracy and efficiency in claims processing.  These
represent HCFA's major initiatives toward better oversight of
Medicare contractors' antifraud and antiabuse activities. 


   HCFA'S DATA ANALYSIS INITIATIVE
--------------------------------------------------------- Appendix 2:1

Since our 1992 high-risk report, HCFA has acted to improve certain
antifraud and antiabuse activities of the Medicare contractors. 
Central to this effort has been HCFA's development of the "focused
medical review" requirement, which specifies how contractors should
review their payment data for identifying and correcting problems
that cause excessive Medicare spending. 

Prior to this requirement, contractors were expected only to look for
physicians whose claims suggested they might be overbilling or
engaged in some other wrongdoing.  Under the new requirement,
contractors must also examine spending for medical procedures to
identify questionable spending patterns and trends. 

For example, when a Medicare contractor in Tennessee compared its
payments for selected services with those of other contractors, it
found an instance where total payments for a service--pathology
consultations--were not in line with other contractors' totals. 
Specifically, the contractor was paying pathologists for
consultations when the test results could have been interpreted by
the requesting physician.  The contractor revised its payment rule
governing pathology consultations, and reimbursements for this
service declined from $2.7 million in 1988 to less than $11,000 in
1992. 

In first implementing the focused medical review requirement,
contractors charged that HCFA's guidance was not specific enough to
enable them to carry out certain components of the requirement.  HCFA
has since updated its guidance to contractors, providing the needed
specificity. 


   HCFA'S NEW CLAIMS PROCESSING
   SYSTEM
--------------------------------------------------------- Appendix 2:2

HCFA has also begun a major systems acquisition effort--the
development of a new claims processing system called the Medicare
Transaction System (MTS).  MTS is intended to replace the 14
different claims processing systems used by Medicare contractors with
a single system expected to have improved capabilities.  Using the
current multiple systems, HCFA has difficulty aggregating information
on spending, savings, and workload at the various claims processing
contractors.  Inadequate management information makes it difficult
for HCFA to provide the oversight required of a national program. 
The new system, which promises to format claims data uniformly and
produce comparable payment data, is expected to provide HCFA with
prompt, consistent, and accurate management information. 

The system is not yet in the design phase, and full implementation
is, optimistically, at least 3 years away.  HCFA revised its initial
planning and acquisition strategy to reduce the risk of cost overruns
and failure to achieve intended benefits.  However, inherent risks
remain due to the size, complexity, and importance of MTS to the
administration of the Medicare program.  In 1994, we recommended
continued top management and congressional oversight to ensure the
system's success. 


   OTHER GOVERNMENT ACTIONS
--------------------------------------------------------- Appendix 2:3

Table 1 highlights other ways in which HCFA, the Office of Management
and Budget, and the Congress have addressed certain problems cited in
our 1992 report--namely, flawed payment policies, weak billing
controls, inconsistent management of Medicare contractors, and
inadequate funding for payment safeguard activities. 



                           Table 1
           
           Examples of Government Actions Taken to
               Address Medicare's Vulnerability

Problems
areas
cited in
1992
report    Government actions
--------  --------------------------------------------------
Contract  To promote consistency in contractor reimbursement
or        and coverage policies, HCFA consolidated
manageme  processing of durable medical equipment claims
nt and    within four regional contractors.
oversigh
t         HCFA modified the Contractor Performance
          Evaluation Program to broaden the range of
          activities for which a contractor may be assessed.
          In 1994 HCFA did not renew the contracts of two
          poorly performing Medicare contractors and placed
          a third on notice.

Payment   OBRA 1993 implemented a phased reduction in fee
policies  schedule amounts for clinical lab tests to a level
          at which Medicare's contribution to laboratories'
          profits does not exceed the laboratories' overall
          profit rates.

          OBRA 1993 phases in a decrease in reimbursement
          for anesthesia services performed by nurse
          anesthetists under the medical direction of a
          physician anesthesiologist.

Billing   OBRA 1993 includes new restrictions on Medicare
controls  and Medicaid self-referrals and becomes effective
          largely in 1995.

          HCFA established a National Supplier Clearinghouse
          responsible for certifying suppliers and issuing
          billing ID numbers as conditions for authorization
          to bill Medicare.

          HCFA has identified requirements for a national
          system of provider numbers to track providers that
          are reimbursed by multiple health insurance plans.

Funding   OMB released nearly $20 million in contingency
for       funds to help contractors recover $613 million
safeguar  owed Medicare by other insurers. This was a one-
d         time infusion of funds into the Medicare Secondary
activiti  Payer program to allow contractors to reduce
es        workload backlogs pertaining to the recovery of
          the mistaken payments.
------------------------------------------------------------

HEALTH CARE DELIVERY EXPANSION
WIDENS OPPORTUNITY FOR
PROFITEERING
=========================================================== Appendix 3

Despite some progress in addressing specific payment and management
problems, Medicare remains vulnerable.  Since Medicare was enacted in
1965, the delivery of health care services has become more complex,
but Medicare's fraud and abuse controls have not kept pace.  Thirty
years ago, providers typically billed Medicare as independent
entities--a physician, hospital, or nursing home, for example.  More
recently, as a greater number of providers deliver and bill for
services as large corporate entities, the billing abuses of one "bad
apple" can have repercussions nationwide.  For example,

in 1994, a national psychiatric hospital chain, charged with
committing fraudulent practices to increase reimbursements, paid over
$300 million in the largest settlement to the federal government for
health care fraud; and

from 1988 to 1991, two of the nation's largest clinical laboratory
companies systematically overbilled Medicare tens of millions of
dollars for lab tests. 

In addition, complex billing arrangements have developed through the
consolidation and vertical integration of such health care providers
as hospitals, physician practices, diagnostic centers, and home
health agencies.  These arrangements make it difficult for payers to
identify the sources of inflated charges or other billing abuses. 

To complicate matters, some of Medicare's claims processing
contractors are also moving into the health delivery business.  In
addition to HMOs, some health insurance companies have begun
investing in physician groups, hospitals, and other providers of
medical services and supplies.  Several Medicare contractors are
among those companies actively engaged in diversification.  This
means that these contractors, which are responsible for reviewing the
appropriateness of Medicare claims are also, in principle, billing
Medicare through medical care networks they own.  In a 1994
memorandum to Medicare contractors, HCFA stated that "...a clear
conflict of interest [exists], for example, for a Medicare carrier to
process claims submitted by a physician who is employed by a medical
group controlled by the carrier, or an intermediary [Medicare
contractor for reviewing hospital claims] to audit hospitals in which
the intermediary is a major investor." The memo asked that
contractors inform HCFA of any providers they may own or in which
they have an investment.  As of early November 1994, HCFA was aware
of eight contractors for which conflict of interest was a concern due
to the contractors' ownership interests in health service delivery. 


   REHABILITATION THERAPY
   ILLUSTRATES GAMING OF
   TRADITIONAL PAYMENT RULES
--------------------------------------------------------- Appendix 3:1

The inability of the government to respond quickly and effectively to
profiteering heightens Medicare's vulnerability to exploitation. 
Medicare's reimbursement of rehabilitation therapy services is a case
in point. 

An entire industry has grown and flourished out of a federal
requirement to assess nursing home residents for their need for
rehabilitation therapy services.  From 1990 to 1993, claims submitted
to Medicare for these services tripled to $3 billion.  Some of this
cost growth is attributable to the excessive rates Medicare pays for
therapy services.  For example, Medicare has been charged rates as
high as $600 per hour, though physical, occupational, and speech
therapists' salaries range from under $20 to $32 per hour. 

Medicare's open-ended definition of reimbursable costs and the
absence of clear billing rules account for this situation.  Combined,
these two weaknesses enable skilled nursing facilities and therapy
companies to pad the amount of administrative costs for which they
are reimbursed by Medicare.  Loose payment and billing rules also
allow providers to pass on these inflated charges with little or no
scrutiny. 

One questionable business practice is that of therapy companies using
a skilled nursing home's provider number to bill Medicare.  Under
such an arrangement, the therapy company bills Medicare as if the
patients had received services in that nursing facility, though the
patients may be anywhere in the country.  This practice benefits
therapy companies by enabling them to evade Medicare controls that
might flag overbilling.  For example, one therapy company divided a
Texas patient's $10,950 claim for physical therapy between nursing
homes that submitted their claims to two different Medicare
processing contractors, one in North Carolina and the other in
Florida. 

Sometimes shell therapy companies are established to enhance
opportunities to overbill.  For example, a Georgia Medicare
contractor reported that the program authorized a company to bill for
therapy services, even though it had no salaried therapists and was
essentially a storefront office operated by one clerical employee. 
The shell company billed Medicare for services provided to nursing
home residents through two therapy agencies with which it
subcontracted.  The company's contractual relationship with the
nursing home entitled it to add to its claims an 80-percent markup
over what the company paid the therapy agencies.  As a result, a
company that appeared to exist solely for the purpose of billing
Medicare added in one fiscal year about $135,000 in administrative
charges to the costs of the therapy services. 

Although aware of these problems since 1990, HCFA did not act until
1993 to advise claims processing contractors of certain irregular
billing practices and of actions they could take to minimize billing
problems.  HCFA is also in the process of establishing certain
reimbursable cost guidelines, but drafting and implementing them
could take years, judging from similar efforts in the past. 


   MEDICARE'S HMO PAYMENTS ALSO
   RESULT IN LOSSES
--------------------------------------------------------- Appendix 3:2

Medicare also loses money through its methodology for paying HMOs
that participate in the "risk contract" program.\2 Medicare pays
these HMOs a flat monthly fee for each beneficiary enrolled.  The law
sets this fee at 95 percent of the estimated average cost of serving
a Medicare beneficiary in the fee-for-service sector.  Numerous
independent and HCFA-sponsored research studies have demonstrated
that HMO enrollees tend to be healthier than beneficiaries who remain
in the fee-for-service sector, but HCFA's method of computing rates
does not take this into account.  As a result, HCFA has paid HM0s
more--from 6 percent to 28 percent--for beneficiaries' treatment than
it would have spent had those same beneficiaries remained in the
fee-for-service sector. 

Although the problems in linking HMO and fee-for-service payments are
widely acknowledged, there is little agreement over proposed
solutions.  We identified four alternative risk adjustment mechanisms
that--unlike HCFA's current system--would adjust payments based on
the health status of enrollees.  Any of these four risk adjustment
methods could reduce favorable selection and allow Medicare to
achieve cost savings under the risk contract program.  In 1994, we
recommended that HCFA conduct research on payment methods that could
replace the reliance on fee-for-service reimbursement to determine
base payment rates for HMOs. 


--------------------
\2 Under a risk contract, the HMO provides all necessary medical care
in return for a predetermined payment from Medicare for each enrolled
beneficiary.  Within certain limits, risk HMOs can profit if their
cost of providing services is less than the predetermined payment,
but the HMOs run the risk of a loss should their cost be higher. 


FUNDING AND MANAGEMENT PROBLEMS
LEAVE HCFA ILL-EQUIPPED TO PROTECT
MEDICARE
=========================================================== Appendix 4

Physicians, supply companies, or diagnostic laboratories have about 3
chances out of 1,000 of having Medicare audit their billing practices
in any given year.  Moreover, Medicare pays more claims with less
scrutiny today than at any other time over the past 5 years. 
Government funding of claims review and other fraud and abuse control
activities has declined relative to the growing number of Medicare
claims.  In fiscal year 1993, Medicare processed almost 700 million
claims, about 250 million more than it processed 5 years earlier. 


   CONTROLS OVER MEDICARE PAYMENTS
   DETERIORATE DUE TO BUDGET
   CONSTRAINTS
--------------------------------------------------------- Appendix 4:1

Despite the rising volume of claims, per-claim funding for antifraud
and antiabuse activities declined between 1989 and 1993 by over 20
percent.  The largest portion of this funding pays for Medicare
contractor staff who develop payment controls, review claims, and
investigate suspect providers.  Annual per-claim funding reductions
have forced HCFA to lower the proportion of claims that contractors
must review.  In 1989, HCFA set targets for contractors to suspend
processing and review 20 percent of all claims; it reduced this
target to 15 percent in 1991, 9 percent in 1992 and 1993, and 5
percent in 1994.  HCFA also reduced by a third the number of audits
of providers that contractors are required to perform.  The purpose
of these audits is to identify and recover overpayments. 

When claims volume grows but the number of staff remains constant or
declines, contractor staff perform fewer or less stringent antifraud
and antiabuse activities.  In some instances, contractors have
curtailed or discontinued reviews of medical services for which there
has been evidence of widespread billing abuse and potential for
significant savings.  For example, a contractor we visited this year
temporarily reduced or suspended the use of five electronic controls
that triggered further review of the claims by contractor staff. 
These reviews had previously resulted in the denial of claims
submitted and $4 million in savings over a 3-month period.  The
contractor suspended the use of the controls because the volume of
claims they generated overwhelmed the claims review staff. 

In other instances, contractors have not pursued claims with high
potential for abuse and savings because resources were needed to
complete current claims review work.  At one contractor we visited in
1994, staff had ranked by potential savings eight claim types as
areas warranting further scrutiny.  Staff estimated that, if controls
were developed over the eight claim types, the total potential
savings would be over $57 million for one quarter.  The contractor
did not have the resources, however, to develop controls for the
eight areas. 

The decline in program spending for fraud and abuse controls
corresponds in part with the 1990 passage of the Budget Enforcement
Act.  That act places stringent limits, or caps, on discretionary
spending, which covers Medicare administrative costs, including the
cost of contractors' fraud and abuse controls.  Benefit payments,
however, are not subject to these caps.  This creates a dual problem. 
Any increase in spending for Medicare's fraud and abuse controls
would require cuts in funding for other programs, such as education
or welfare.  A decline in benefit costs, however, even if
attributable to savings from fraud and abuse activities, cannot be
used as an offset.  In fact, funding for fraud and abuse activities
is in continual jeopardy, since cutting this funding could free up
money for other programs. 

Reduced antifraud and antiabuse funding, however, translates to
greater Medicare costs.  HCFA figures indicate that spending for
antifraud and antiabuse activities can reduce Medicare program costs
on average by as much as 11 times the amount invested.  In effect, by
not adequately funding these activities, the federal government is
missing a significant opportunity to control Medicare program costs. 


   MANAGEMENT DEFICIENCIES
   COMPOUND FUNDING PROBLEMS
--------------------------------------------------------- Appendix 4:2

Problems in HCFA's management of Medicare's claims processing
contractors further weaken the Medicare program.  In general, the
contractors are responsible for developing payment controls and
carrying out antifraud and antiabuse activities.  HCFA is responsible
for overseeing these efforts, but the lack of information regarding
contractors' activities limits its ability to ensure that contractors
are adequately protecting Medicare payments from provider
exploitation or fraud. 

In addition to certain national policies, each contractor has its own
coverage policies and its own controls to enforce them.  Typically,
these prepayment controls are programmed into the contractor's claims
processing software so that claims in process not meeting stipulated
coverage criteria can be flagged for further review.  HCFA has little
information on the criteria contractors use to identify claims that
may not be eligible for payment.  As a result, HCFA cannot explain
why some contractors pay many more claims for certain procedures than
do other contractors. 

For example, each year Arizona's Medicare contractor pays for about
700 chiropractic manipulations for every 1,000 beneficiaries, whereas
Louisiana's contractor pays for about 150 manipulations for the same
number of beneficiaries.  HCFA has not assessed whether the spending
differences between these contractors are related to better payment
controls at one contractor or some other factor. 

Moreover, HCFA makes little use of the management reports contractors
submit that describe their claims review activities.  This lack of
attention may help explain why HCFA did not probe when, in one year,
a contractor reported a 53-percent drop (amounting to $26.9 million)
in the amount of savings it achieved through claims review.  In its
1992 contractor evaluations, HCFA gave this contractor a maximum
score for the relevant segment of its program safeguard activities. 


CONCLUSIONS
=========================================================== Appendix 5

Several significant problems limit HCFA's ability to protect the
Medicare program from serious financial losses.  Inadequate
contractor funding has limited the development of necessary fraud and
abuse controls.  Also, these controls depend heavily on the analysis
of payment data, but HCFA's efforts to enhance contractors' data
analysis capabilities are only in the planning or early
implementation stages. 

Adding to the potential for Medicare losses is the expansion of
health care provider types to large, multilayered corporations.  The
exploitation of Medicare's rehabilitation therapy reimbursement
illustrates the ability of an unscrupulous profiteer to shield
questionable billings in complicated financial arrangements.  In
addition, as the trend continues for Medicare contractors to
diversify their businesses to involve health care delivery, checks on
Medicare payments could be compromised because these checks will
increasingly be performed by the same entity that submits the claims. 

In essence, HCFA needs to guard a thousand doors but has the
resources to guard only a few hundred.  This dilemma leaves the
Medicare program seriously exposed and vulnerable to losses. 


RELATED GAO PRODUCTS
=========================================================== Appendix 6

Medicare Part B:  Regional Variations and Denial Rates for Medical
Necessity (GAO/PEMD-95-10, Dec.  19, 1994). 

Medicare:  Referrals to Physician-Owned Imaging Facilities Warrant
HCFA's Scrutiny (GAO/HEHS-95-2, Oct.  20, 1994). 

Medicare:  Changes to HMO Rate Setting Method Are Needed to Reduce
Program Costs (GAO/HEHS-94-119, Sept.  2, 1994). 

Medicare:  Shared System Conversion Led to Disruptions in Processing
Maryland Claims (GAO/HEHS-94-66, May 23, 1994). 

Medicare:  Inadequate Review of Claims Payments Limits Ability to
Control Spending (GA0/HEHS-94-42, Apr.  28, 1994). 

Health Care Reform:  How Proposals Address Fraud and Abuse
(GAO/T-HEHS-94-124, Mar.  17, 1994). 

Medicare:  Greater Investment in Claims Review Would Save Millions
(GAO/HEHS-94-35, Mar.  2, 1994). 

Medicare:  New Claims Processing System Benefits and Acquisition
Risks (GAO/HEHS/AIMD-94-79, Jan.  25, 1994). 

Medicare:  Adequate Funding and Better Oversight Needed to Protect
Benefit Dollars (GAO/T-HRD-94-59, Nov.  12, 1993). 

Psychiatric Fraud and Abuse:  Increased Scrutiny of Hospital Stays Is
Needed for Federal Health Programs (GAO/HRD-93-92, Sept.  17, 1993). 

Health Insurance:  Remedies Needed to Reduce Losses From Fraud and
Abuse (GAO/T-HRD-93-8, Mar.  8, 1993). 

High-Risk Series:  Medicare Claims (GAO/HR-93-6, Dec.  1992). 

Medicare:  One Scheme Illustrates Vulnerabilities to Fraud
(GAO/HRD-92-76, Aug.  26, 1992). 

Health Insurange:  Vulnerable Payers Lose Billions to Fraud and Abuse
(GAO/HRD-92-69, May 7, 1992). 


1995 HIGH-RISK SERIES
=========================================================== Appendix 7

An Overview (GAO/HR-95-1)

Quick Reference Guide (GAO/HR-95-2)

Defense Contract Management (GAO/HR-95-3)

Defense Weapons Systems Acquisition (GAO/HR-95-4)

Defense Inventory Management (GAO/HR-95-5)

Internal Revenue Service Receivables (GAO/HR-95-6)

Asset Forfeiture Programs (GAO/HR-95-7)

Medicare Claims (GAO/HR-95-8)

Farm Loan Programs (GAO/HR-95-9)

Student Financial Aid (GAO/HR-95-10)

Department of Housing and Urban Development (GAO/HR-95-11)

Superfund Program Management (GAO/HR-95-12)

The entire series of 12 high-risk reports can be ordered by using the
order number GAO/HR-95-20SET. 

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